Bond traders entered 2026 with a clear macro conviction: that the U.S. yield curve would steepen as short-term rates fall faster than longer-dated yields. A softer-than-expected U.S. jobs report has now given that view renewed credibility. December employment growth undershot forecasts, keeping alive expectations that the Federal Reserve will need to ease policy further to support the economy. For investors positioned in short-maturity Treasuries, the data reinforced the idea that policy-sensitive bonds may continue to outperform longer-duration debt over the coming year.

Labor Market Signals Reinforce the Steepener Thesis

The latest employment figures offered a mixed but market-moving signal. While job growth slowed, the unemployment rate edged lower, underscoring an economy that is cooling but not collapsing. For bond markets, that balance matters. Slower hiring eases pressure on the Fed to keep rates restrictive, even as resilience in employment prevents an abrupt shift into aggressive easing. The immediate response was a further widening of the gap between two-year and 10-year Treasury yields, which reached its largest level in nearly nine months.

The so-called steepener trade—long short-term bonds while shorting or underweighting longer maturities—was one of the most popular fixed-income strategies of 2025. Its success so far in early 2026 suggests that investors remain confident the Fed’s next meaningful move will be toward lower rates, even if the timing remains uncertain.

Policy, Politics, and the Long End of the Curve

Beyond economic data, political developments have added volatility to the long end of the Treasury market. Recent comments from Federal Reserve Chair Jerome Powell regarding legal pressure on the central bank triggered a selloff in longer-dated bonds, pushing the 30-year yield higher even as short-term yields declined. That divergence further benefited steepener positions, but it also highlighted the fragility of sentiment around long-term fiscal and institutional risks.

Investors are also watching potential policy shocks closely. Uncertainty around tariffs, mortgage bond purchases by government-sponsored enterprises, and heavy Treasury issuance has kept upward pressure on long-dated yields. With tens of billions of dollars in 10- and 30-year auctions scheduled, supply dynamics alone could limit how far long-term yields fall, even if growth slows.

Inflation: The Key Constraint on Further Gains

Despite the recent validation of steepener trades, inflation remains the central risk. Upcoming consumer price data is expected to show that price pressures remain sticky, strengthening the case for the Fed to pause rather than accelerate cuts. Markets currently price the next rate reduction for mid-2026, followed by another later in the year. Any shift in that outlook could quickly reshape yield-curve positioning.

Some strategists caution that much of the steepening may already be behind us. A stable labor market combined with persistent inflation would argue for fewer cuts, limiting downside for short-term yields. That tension explains why some investors have begun trimming exposure, even as the trade remains popular across large active bond funds.

Looking Ahead: What Bond Investors Should Watch

For now, the steepener remains a favored expression of macro uncertainty rather than a one-way bet. Economic data, Treasury supply, and inflation readings will determine whether the curve can steepen further or begins to flatten again. Longer term, leadership changes at the Fed and evolving fiscal policy could reprice rate expectations entirely.